Posts Tagged ‘dissolution’

Cynthia Madsen (not her real name) was, according to her doctor, already showing signs of dementia in 2007. In fact, her doctor wrote that she was not able to manage her own financial affairs. By mid-2009, her condition had worsened; her doctor wrote that she could not make decisions in her own best interests, and that her children should seek a guardianship because there was danger that someone might try to take advantage of her.

No guardianship or conservatorship proceeding was initiated, though — Cynthia continued to live at home with the assistance of a caregiver and a live-in friend named Patrick. In 2011 — almost two years after her doctor reported that Cynthia could make no decisions on her own — Patrick asked Cynthia’s minister to officiate as he and Cynthia got married. The minister refused, saying he did not believe Cynthia was competent to make such a life decision.

Things began to accelerate a few months later. Cynthia was admitted to the hospital . Cynthia’s daughter filed a guardianship and conservatorship proceeding. In the course of that proceeding, a court-appointed investigator interviewed Cynthia and wrote that she was incapacitated; the investigator recommended that a full guardian and conservator should be appointed. The next day, Patrick and Cynthia were married. Two days after that, Cynthia’s daughter was appointed as her temporary guardian and conservator, and moved her to a care facility.

As guardian and conservator, Cynthia’s daughter filed a petition to dissolve the marriage or, in the alternative, to annul it. The difference is important — dissolution of the marriage (what most of us still refer to as “divorce,” though the terminology changed decades ago) recognizes that the married couple are unhappy in the marriage, or that at least one of them believes the marriage is irretrievably broken. Annulment, on the other hand, recognizes that the marriage was never valid in the first place.

While the dissolution/annulment case was pending, Cynthia died. The divorce court promptly dismissed the dissolution part of the petition — a divorce can not be granted after the death of one spouse, since the marriage is, in a sense, dissolved by the death. But the annulment proceeding continued. Ultimately, the court ruled that Cynthia was incompetent to enter into a marriage contract, and so the marriage never was effective. The annulment was granted.

The Arizona Court of Appeals upheld the annulment. It is irrelevant, ruled the judges, that Patrick claimed that neither he nor Cynthia was unhappy in the marriage. It is irrelevant that Cynthia died while the case was pending. In this case, there was clear evidence that Cynthia did not understand the nature and significance of the marriage ceremony, and the trial judge’s determination that there was no effective marriage was allowed to stand. Savittieri v. Williams, January 2, 2014.

It is worth noting that the result in this new Arizona case did not depend on the fact that a guardian and conservator was appointed almost immediately after the “marriage” ceremony. The fact of guardianship and conservatorship, by themselves, would probably not be enough to invalidate the marriage. As we have previously noted (this time citing a Missouri case with illustrative facts), the question is not whether a guardian or conservator was, or could be, appointed — it is whether the person understood the nature of the marriage and had mental capacity to enter into the marital contract itself. Cynthia did not — the guardianship and conservatorship were based on that incapacity, but did not necessarily prove it.

MAY 30, 2011 VOLUME 18 NUMBER 19
Periodically we try to answer some of our readers’ frequent questions, which we enjoy receiving. Some more recent questions and our quick attempts at simple answers follow. Remember, please, that slight variations in fact patterns can lead to different answers; these are intended as illustrations and guidance, not as iron-clad answers to your legal concerns. Please consult your lawyer (and we’d be interested in taking on that role, if you live in Arizona and would like to call and make an appointment) before relying on this information.

Can I leave my IRA account to a third-party special needs trust for my daughter?

Yes, you can. It may not be the best answer, and it may raise a number of other issues and concerns, so please talk to your lawyer about your specific situation. But one of your choices is indeed to leave the IRA (or a retirement plan of any kind) to your daughter’s special needs trust.

If a significant portion of your wealth is tied up in an IRA, 401(k), 403(b) or other tax-deferred retirement plan, there is plenty of information out there about how important it is to name individual beneficiaries, how the plan ought to be divided upon your death into shares for each beneficiary, and how your beneficiaries should be encouraged to “stretch out” their withdrawals as long as possible. We agree with all of that — but if one of your beneficiaries has a disability, and particularly if she is receiving Supplemental Security Income, Medicaid or other means-based public benefits, it is also important to create a special needs trust for that beneficiary. There is no reason her share of your IRA can not be made payable to that special needs trust.

The notion of naming a trust as beneficiary of a retirement account is fairly novel. Not too many years ago it was absolutely to be avoided, and many investment advisers, accountants, lawyers and financial companies retain that anti-trust bias deeply embedded in their collective and corporate psyches. But the rules are different now, and it is much easier to name a trust as beneficiary. You just need good advice from someone who is familiar with those rules and can explain how they affect your retirement account in your family situation.

In general terms, the primary effect of naming a trust as beneficiary will usually be that the age of the oldest person who might ever receive benefits from the trust will be used to calculate the withdrawal rate. But let’s see if we can make the explanation clearer. Let’s assume that your daughter, Diana, is 47. You also have two sons, Steven (age 54) and Scott (age 43). You have named Diana’s special needs trust as beneficiary of 1/3 of your IRA. Sadly, you die this year (we don’t mean anything personal — we have to let you die some time in order to ever figure out the effect of your beneficiary designations).

Next year Steven will have to withdraw at least 1/29.6 of his share of your IRA (we figure that as about 3.38%). Scott has to withdraw at least 1/39.8 of his share (that looks like about 2.51%). Diana would have to withdraw at least 1/36 (2.78%) if she had been named as beneficiary outright, but she wasn’t. So how much will her special needs trust have to withdraw?

It depends on who is named as remainder beneficiary. If upon Diana’s death the remaining money in the special needs trust goes to Scott and Steven, then we use Steven’s age for the calculation and the trust will have to withdraw the same 3.38% that he had to withdraw from his share. If Diana’s trust goes instead to her two sons (ages 15 and 17) then Diana herself is the oldest beneficiary and we can use her age — and the withdrawal will be 2.78%.

Clear as mud? Yes, but you should have seen the rules before they were simplified in 2002. While the numbers are daunting, the current rules are actually pretty easy to figure out, and the ability to stretch out distributions from your IRA for another 36 years (or so) allows Diana’s share to continue to grow tax-deferred, despite the need to put her share in trust.

Want more information, or the numbers for your own children’s ages? Look at the IRS’s Publication 590. Appendix C is Table I, the Single Life Expectancy table to be used by IRA (and 401(k), 403(b) and other) beneficiaries.

Assume husband and wife, married many years, were divorced five years ago. He was ordered to pay alimony of $1,000/month to her for the rest of her life. She has now gone into the nursing home, and has spent all of her own funds for her care. She has qualified for Arizona’s Long Term Care System (ALTCS — it’s Arizona’s version of the long-term care Medicaid program) payments toward her nursing home bills; she turns over her alimony payment and all but about $100/month of her Social Security, and ALTCS pays the balance of her nursing home bill.

If her ex-husband could legally stop paying the alimony payments, ALTCS would simply increase the payment to the nursing home by $1,000. She would be no worse off and he wouldn’t be subsidizing her nursing home care any more.

Because he is legally obligated to continue the alimony payments, however, ALTCS will continue to count them in its calculation of how much to pay to the nursing home. And if he went to court to argue “changed circumstances” and no continuing need to pay alimony, he might find that her attorney argues that the changed circumstances justify increasing the alimony payments so that she is not on ALTCS at all. Even if that didn’t happen, ALTCS might be inclined to view the proceeding as a sham just to get him out of paying the support payments. So it is far from certain that he would be better off by going back to the courts.

What about the reverse situation? Let’s imagine for a moment that it is the ex-husband who has gone into the nursing home. He has spent down all of his assets and applied for ALTCS. He receives $2,800/month in Social Security another $1,500 in private retirement; ALTCS says that he must turn over all but about $100/month of that income to the nursing home, and it will pick up the (small) difference.

Can he stop paying alimony? Well, no. The divorce court has ordered him to pay, and he needs to go back to argue “changed circumstances” as a way of getting out of having to make the payments. Will ALTCS, then, reduce his contribution requirement, recognizing that he is under a legal obligation to pay the alimony? Well, no. They say that his care comes first, and the entire income (minus his small personal needs allowance) has to go toward his care — and their payment to the nursing home will reflect that calculation.

What should he do? He needs to get legal help and get his support order modified. He should not simply ignore the outstanding alimony award.

Please note that “alimony” is not called that any more, and “divorce” is also an old-fashioned word. They are common in the vernacular, but the legal terms — at least in Arizona — are now “spousal maintenance” and “dissolution,” respectively. We know that, but we fear that it makes the explanation so much harder to read.